In mining for gold, the gold is already present in the mineral deposit. It cannot be extracted without work. After the work is done, one has something, which is the gold. Why should this process create or arrive at value for the gold? It’s because one gets the pure mineral and it has properties that people desire.
Mining for bitcoins differs from mining for gold. It is more analogous to digging a hole, then filling it back up, whereupon one is rewarded with a cheap ribbon. The hole is the mathematical puzzle. Filling up the hole is solving the puzzle. The bitcoin is the ribbon.
Why should this process create a value for the ribbon larger than its very low marginal cost? It’s because the bitcoin has properties that people desire, we are told, such as being able to send them across borders easily. However, bitcoins are not anonymous. The transactions in bitcoins can be taxable. The gains in bitcoins can be taxable. Bitcoin transactions are not reversible. It is not so clear that bitcoin’s properties are going to be widely desirable.
Suppose that I do the following. I identify a large rock on Mars. I stipulate that I will divide it into 21 million equal pieces on an imaginary basis. No energy need be expended to do this. Each unit is called a bitrock. I guarantee that I will do this only once, and I place $1 million in escrow as surety, to be distributed to any holders of bitrocks pro rata if I break my word. I will auction off these bitrocks according to a pre-announced schedule of price and quantity over the next 4 years, at a rising price and diminishing rate of quantity issue. I create a computerized system by which people can keep track of their bitrocks and transfer them safely and without counterfeiting. No need actually to get them from Mars, you see. And so on. How does this differ in any essential respect from bitcoins?
It seems to me that bitcoins are just as imaginary as bitrocks, but they have been made to seem concrete by having people dig for them by using energy and computing devices. But why bother digging holes and filling them up? Why not cut to the chase? If it’s limited supply that people want, that can be arranged quite easily.
6:46 pm on December 5, 2013
